Evaluation of the indirect economic effects of transport investments

The benefits of a single investment project to the transport system primarily consist of its direct benefits, which first of all include the cost savings from reduced travelling and transportation times. These benefits already tend to be properly covered in the application of cost-benefit analysis. Transport investments may, however, also have indirect economic effects that are not yet captured in project evaluation. The investment project may, for instance, stimulate economic growth, employment and productivity growth. However, evaluation of these indirect benefits, either in monetary terms or even qualitatively, is difficult. The purpose of this paper is to sketch the outlines of the indirect effects. Both the potential benefits and their mutual interactions are considered. The paper has been written to stimulate discussion on the wider influence of transport investment, rather than to provide any conclusive rules for project evaluation. The paper also aims at providing tools for bridging the gap between the occasionally high-flying economic research and the everyday practices of project evaluation. The paper presents a simple framework for evaluation of the indirect effects of transport investments. The framework shows the potential causality mechanisms between a transport investment project, economic growth and a number of factors affecting regional dynamics. The study briefly presents the available evaluation methods, and discusses the limits to the accuracy of the evaluation procedure. The paper also discusses the circumstances under which the evaluation of indirect effects pays off, if the costs for carrying out the evaluation are taken into consideration. Input-output analysis has frequently been applied in the evaluation of public infrastructure investments. The methodology allows measurement of the direct and multiplier effects of a project on aggregate demand, and further, evaluation of the impact of the project on regional economic growth and employment. The effects on aggregate demand exaggerate the actual indirect effects, however, since increased demand reflects the costs rather than the benefits of the project. Transport investments may also contribute to regional development. A more effective transport system may improve the competitiveness of companies, affect decisions on investment and choices concerning the location of companies, improve the availability of labour, or stimulate migration. The evaluation of indirect effects is more likely to be beneficial in the case of large investment projects, as only large investments have the potential to impact on the development of regions. Finally, three qualitative measures for the indirect effects were constructed, and presented in the form of impact axes. The measures were based on three channels through which infrastructure affects regional development. One of the axes focuses on reduced transportation costs, one on the availability of the workforce and one on the impacts of investment on land use. This report may be found at http://alk.tiehallinto.fi/julkaisut/pdf3/lts_2011-02_liikennehankkeiden_epasuorien_web.pdf